Insurers face disputes with their reinsurers over COVID-19 business income claims in the UK

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Major insurance companies, ordered by Britain’s highest court to pay thousands of small businesses millions of pounds in COVID-19 disruption claims, face battle with reinsurers over who should pay the bill, industry sources said.

Bars, beauty salons, nightclubs and other small businesses won the right to business interruption insurance payments in January after senior judges ruled that many insurance policies should cover losses caused by lockdowns in a test case brought by the UK market surveillance body.

But senior insurance executives said the judgment, which affects 60 insurers, did not help clarify whether insurers or their reinsurers – companies that provide financial protection to the industry – are required to pay.

“We have to fight,” a senior insurance executive told Reuters.

“We expected reinsurers to take their share, but there is always a bit of a backlash – this is how [reinsurers] are programmed.

Britain’s handling of this case and any subsequent feuds with reinsurers are being watched by investors around the world, where disputes between insurers and companies over pandemic-related claims have yet to be resolved in many cases.

In the United States, for example, companies affected by a pandemic have filed nearly 1,500 individual lawsuits. Insurers have won a large number of cases so far.

Steve McGill, CEO of insurance broker McGill and Partners, said the interpretation of the wording of these complex policies often comes down to how insurers and reinsurers perceive the “shades of gray.”

The Association of British Insurers has said insurers will pay two billion pounds ($ 2.79 billion) for unchallenged business interruption claims in 2020. But they could face billions more in claims after the judgment Supreme Court, industry sources said.

Certain clauses in reinsurance contracts will limit the amount that insurers can recover from reinsurers, investment management firm Tangency Capital said in a recent letter to investors, meaning that “business interruption losses will primarily be borne by insurers “.

Tail risk?

The UK case revolved around major insurers such as Hiscox, RSA, QBE, Argenta, Arch and MS Amlin.

Large reinsurers include Munich Re, Swiss Re and syndicates in the Lloyd’s of London market.

Hiscox has already increased its 2020 estimate of pandemic-related business disruptions by $ 48 million net of reinsurance, bringing the total claims to nearly $ 190 million.

RSA said after applying the catastrophe reinsurance protection, it estimates the Supreme Court ruling would cost it around £ 85million – before implementing a new group-wide comprehensive reinsurance program. . Managing director Stephen Hester told Reuters last month the company was not in conflict with reinsurers.

MS Amlin, Argenta, Hiscox and QBE declined to comment. Arch did not respond to a request for comment.

Reinsurer Munich Re has said it will not question valid claims, while Lloyd’s welcomed the clarity for policyholders. Swiss Re declined to comment.

But investors remain concerned about potential conflicts with reinsurers, said Colm Kelly, co-head of European insurance equity research at UBS.

“… investors have asked the question: is there an extreme risk, however small, that some reinsurers will dispute payments? He told Reuters. He also said: “There are small reinsurers operating in Europe that could have a solvency event if they were to cover claims of this size and nature.”

Under European Union solvency rules, insurers must maintain certain levels of capital.

Damage

In the meantime, insurers have started making payments or offers to settle. While a cafe in east London said it was only offered £ 13, other businesses are expecting tens of thousands of payments.

Companies had to wait 10 months for many insurance claims to be declared valid, accumulating debts that threatened their future.

Ralph Fearnhead, chief legal officer at Reya’s Mishcon law firm, which represented some policyholders in the UK case, said subsequent claims for damages due to late insurance payment could eclipse the size of ” an initial complaint if companies were to lay off staff or go into liquidation. And reinsurers are likely to question such claims.

“When it comes to an insurer’s failure to act within a reasonable time, it’s hard to see that reinsurers would willingly accept additional damage,” he said.

Disputes may not result in further court appearances, as disagreements between insurers and reinsurers are often resolved in private arbitration hearings.

These types of hearings are already taking place in the so-called event cancellation market, following the cancellation of global sporting and music events and conferences due to the pandemic.

($ 1 = 0.7167 pounds) (edited by Jane Merriman)

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COVID-19 carriers seek reinsurance for lost profits

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